Though several investors are enjoying the benefits offered by SIP (systematic investment plan)– financial discipline, rupee cost averaging, power of compounding, no need to time the markets, etc., not many investors are aware of the different types of SIPs available to them. Basis your financial needs and other parameters, you can choose among the different types of SIP offered to you. One such type of SIP is top-up SIP. In this article, we will understand what top-up SIPs are and the benefits of investing in top-up SIP.
What is top-up SIP?
Top-up SIP, also commonly known as step-up SIP is a type of SIP that permits individuals to top-up their SIP investment amount regularly by a fixed number or fixed percentage at regular intervals. In simple words, top-up SIPs allow investors to bump their current SIP investments in a systematic manner. Top-up SIPs can be extremely beneficial for investors who are looking to invest a larger amount as opposed to their current SIP investments, but do not wish to engage into the hassles of starting a new SIP investment.
Let’s understand the working of top-up SIP with the help of examples. Rita wishes to top-up her existing SIP investments by 10% each year. Currently, she invests Rs 5,000 per month in ABC scheme. Using the top-up SIP, Rita would have to invest Rs 5,500 the next month, Rs 6,050 the next month, Rs 6,655 the next month, and so on. There’s yet another way Rita could have topped-up her SIP investments – by a fixed number each month. Suppose Rita, decides to top-up her SIP investments by Rs 500 each month. So she’d invest Rs 5,000 the first month, Rs 5500 the next, Rs 6,000 the next, and so on.
Benefits of top-up SIPs
Here are a few reasons why you might consider investing in mutual funds through top-up SIPs:
- No need to open a new SIP investment plan – top-up SIPs save investors from the hassles and efforts of starting and managing several SIP investment plans. By simply topping-up your existing SIP investments, you save yourself the time and efforts towards starting a new one.
- Helps to fight inflation – Inflation, if not managed properly can eat away a huge portion of your returns. One of the best ways to fight inflation is to invest a larger amount in the markets, and top-up SIPs help investors to effortlessly achieve the same in a seamless manner.
- Helps to achieve objectives quicky – Top-up SIPs help investors to achieve their financial goals quicker as compared to regular SIPs. This is because SIP investment amount and investment horizon are inversely proportional to each other. So, when you increase your SIP investment amount, the investment horizon automatically decreases, helping you to reach your goals at a quicker pace.
- Helps an investor to adjust to their increasing income levels – Often an investor begins with a small SIP investment amount when they begin their SIP investment journey. However, with time, as your income levels rise, it is a good idea that you increase your savings and investments as well. A top-up SIP can help an individual to adjust to their increasing income levels in the form of salary increments, bonus, new line of business, etc.
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